China’s purchases of domestic cotton for as much as $1.25 a pound may have been good for its farmers, but it’s crippling China’s domestic textile industry’s competitiveness and hurting global demand, according to Joe Nicosia, executive vice president, Louis Dreyfus Commodities, speaking at the 2013 Beltwide Cotton Conferences in San Antonio.

Restoring the economic health of Chinese textile mills is complicated, but could go a long way to getting world fundamentals back in balance, possibly by the 2014-15 marketing year, Nicosia said.

Nicosia said that the Chinese have built a huge reserve of cotton stocks, around 46 million bales, including cotton imported from the United States and other countries and purchased from its own farmers at inflated rates.

China’s in a bit of a pickle, according to Nicosia. If they sell the high-priced cotton in the reserve to domestic mills at $1.25, it would put their mills at a competitive disadvantage to other mills around the world, and encourage higher blends of polyester. If they sell the cotton at more competitive prices, the losses would exceed $10 billion.

Meanwhile, China’s holding stocks off the market has lessened the impact of an estimated 80 million bales in world ending stocks, an all time high.

“Normally, this would put cotton prices in the 50s,” Nicosia said. “We’re in the 70s because cotton is being held off the market by China. But the longer China holds on to its policy of increasing stocks, the worse and more dire the situation is going to become.

“We’re stuck between two opposing forces. China has decided to support prices at extremely high levels. The problem is we need lower prices to encourage textile mills to use cotton again instead of polyester and provide an incentive to move acreage out of cotton, reduce our supply and bring us back into balance.

“For a ginner, that may not sound good, but we need our supply and demand back in balance so we can have some long-term growth and success. But today, these false high prices are encouraging overproduction. As long as China continues to support the world market and soak up the extra supplies, we’re going have difficulty finding equilibrium in the world.”

Increasing consumption is also crucial.

“The world needs Chinese demand,” Nicosia said. “We have to get it back. China has the premier position, and the world is set up for China to be the premier textile manufacturer and user of cotton in the world. It will be a disaster if we cannot get Chinese consumption back up.

“To do that, we have to provide textile mills with competitively-priced cotton. Once that happens, consumption will start to grow again, and we’ll be able to match our growth in production. World consumption used to be 123 million to 124 million bales. Now it’s down to 106 million bales. That’s 17 million bales not being consumed. And of that is in China. We need to bring it back to where it was before.”

It will require balance in the marketplace, Nicosia said. “The front end of the market has to remain cheap enough to promote cotton consumption at a level at which textile mills are encouraged to use cotton. The back end of the market still has to be prepared to protect acreage. We don’t want a complete collapse. We know it’s hard to get it back when that happens. In 2008-09 when cotton prices collapsed and acreage collapsed, we had to take prices to substantially higher levels before we got that big push in acreage around the world. We don’t want to cause that kind of wild dynamics again.”

Nicosia advised growers to watch for the marketplace shifting its focus from large global supplies to the tight free (available for purchase) stocks. “It will get nervous and move up. That’s when you should be pricing your cotton. And there will be opportunities for some small price spikes to get that done.

“Use those types of opportunities to receive a couple of extra cents. Keep your options open for 2014-15. A lot can change in the world very quickly. Not just for corn and soybean prices, but Chinese policies can change as well. I think once we turn the corner in 2014-15, we reach a point of equilibrium and start to grow consumption again.”

Nicosia doesn’t believe China will suddenly dump its huge reserve on the marketplace. “They spent a lot of money on that cotton. But it is going to be a wet blanket that is going to hang over the market for quite some time.”